5:59a: The program begins with Becky Quick in Omaha. They are sitting in the Nebraska Furniture Mart, a Berkshire retailer. He says he's happy to be there, except "for the hour."

6:00a: Becky asks Buffett about the economy, but before he can answer Joe breaks in with the news that Merck and Schering-Plough are merging in a $41 billion deal.

6:01a: Buffett says he's "surprised by any deal of this size" since its so tough to make deals right now. he says the drug deal could prompt other companies to try to make deals.

6:04a: Back to the economy. "There's been a reset in people's minds." More people are looking for lower prices, which is helping Berkshire's Geico insurance operations, but hurting its jewelry retailers.

6:05a: Economy is "close to the worst case." Can't imagine it being much worse, but if the Fed hadn't stepped in last September it would indeed have been worse. The economy "has fallen off a cliff."

6:06a: Buffett says consumers are "scared and confused." He hasn't seen consumers, or Americans in general, as fearful as now. American people "feel they don't know what's going on" so they've pulled back. Nature of government makes it hard to send consumers a clear message about what Washington is doing, but government will play a huge role in the recovery.

6:09a: We are in a very very vicious feedback cycle. Things will get better, eventually. Just a question of how long it takes. But America has always pulled together in the past and will do it again.

6:10a: Buffett again compares economic situation to the 1941 attack on Pearl Harbor. America put aside "partisan stuff" then and should do so again. "We knew if we stuck together and followed leadership, we would prevail."

6:11a: "You can't turn around on a dime." Many people are scared about losing their jobs and it is affecting their behavior, even if they wind up not losing their jobs.

6:12a: The "great economic machine" is sputtering. It's a job to get it working again. Unemployment will lag at the end. It will "probably go a fair amount higher" than the current 8 percent. But five years from now, the economy will have recovered.

6:13a: Buffett criticizes Democrats for adding "earmarks" and pet spending to economic recovery legislation. Republicans need to work for the common good and Democrats need to stop themselves from trying to "jam in" a lot of spending. There should be "no finger pointing at all." "No vengeance, just look forward."

6:16a: Commercial break. Your emails to come.

6:21a: Both Democrats and Republicans need to work together to solve the nation's economic problems. neither side should be trying to take advantage of the situation.

6:22a: Inflation has the "potential" of being worse than it was in the 1970s. There are no "free lunches" but there are some lunches you need to have even if you'll pay for it later.

6:24a: Ratings agencies believed, like everyone else, that house prices would continue to rise. They made a mistake.

6:25a: Would help if government's policies to help economy were better communicated. We have a system that can help the banks and most banks are in "pretty good shape."

6:32a: Buffett says credit conditions are tightening again, but aren't as bad as they were last September. The government has to "speak with real clarity."

6:36a: Buffett repeatedly compares the economic situation to Pearl Harbor, and suggests that government needs to react in the same unified way to the current challenge as it did in World War II.

6:38a: FDIC has been a "huge factor" in boosting confidence in U.S. banks, and confidence is essential to the functioning of the economic system. A banks that needs to go broke should be allowed to "go broke." Shareholders in banks can lose their money, but depositors should not. We have to make it very clear that people aren't going to lose their money that's deposited in banks.

6:47a:

Emailer asks, "Will everything be all right?" Buffett's strong answer: Yes, everything will be all right. We have a free-market system that unleashes human potential and we are "far from done." "The machine gets gummed up from time to time" but we go forward.

6:49a:

Buffett: there are similarities to the 1930s and there are differences. One similarity is that there was a lack of trust in banks. Now we have a system that backs up the banks, but people don't believe in the system. It needs to be better communicated.

6:50a: Obama speaks wonderfully. Still it needs to be "made as clear as possible" that no one should worry about losing their deposits in a U.S. bank and the President is the person to send that message.

6:51a: Buffett says the financial system was within days or hours of collapse last September. The Fed's "wise, prompt action" to support the commercial paper market and money market funds prevented disaster.

6:53a: "Patriotic Democrats and patriotic Republicans should realize this is a war." Once everyone realizes how serious it is, they will behave well. Both sides need to work together. He refuses to blame one party more than the other.

6:54a: "The American banking system, overall, is too big to fail." Hate to say it, but that is the case. We have to deal with all quasi-financial institutions whether technically a bank or not.

6:55a: "We need banks to get back to banking." Financial institutions can't always show smooth earnings growth. Eventually you're going to cheat. Banks are in a good position. They will "earn their way out of this" given the low cost of funds right now. Money is "cheap, abundant, and the spreads are terrific."

6:57a: People shouldn't worry about banks making too much money. The nation should be focused on what needs to be done.

7A ET HOUR OF ASK WARREN

7:02a: Emailer asks how do we know you're not a Bernie Madoff? Buffett says that's always a problem with financial advisors. It can be hard to know who is honest. "It is a problem who you put your trust in." "Crooks come in many forms." But he rejects the idea that the stock market itself is just a big Ponzi scheme. The machine works, and "equities, over time, are the way to do it."

7:03a: We can't have people worried about banks. Overwhelmingly people are honest, but there will always be crooks.

7:05a: Do you wish you hadn't written the "Buy American" New York Times piece last October? Buffett says he wasn't trying to call the bottom then and wasn't responsible for the headline. He stands by his arguments that you'll do better over a 10-year period with stocks than you will with Treasuries. It's not his game to say exactly when the stock market has bottomed. "I stand by the article, but do wish I had run it a few months later."

7:07a: Goldman and GE deals were attractive at the time last fall because he could get 10 percent on the preferred shares. He doesn't think he could get that yield now.

7:08a: The "fact that business is going to get worse" does not mean you shouldn't buy equities now.

7:09a: American Express is going to be around "forever." Can't buy more stock in the company due to restrictions involving bank holding companies. That doesn't mean it is not a "hell of a buy" at $10/share.

7:10a: Buffett says he likes to have a big cash cushion. Ten billion dollars is the "absolute minimum." Berkshire will do less catastrophe insurance this year. Buffett says Berkshire's insurance units will take on less risk because there's less cash around to handle large, unexpected losses. "We can't depend on anybody."

7:11a: Buy and hold is not dead if you buy into the right companies at the right price.

7:17a: What investment of the past year would you take back? Buffett laughs and says there are several. He cites ConocoPhillips and the Irish banks he mentioned in his letter to shareholders. He concedes he makes lots of mistakes, but hopes his successes make up for the errors.

7:19a: For the companies Berkshire buys, the holding period is "forever." He likes to buy stocks with the idea of holding them for a very long time. Even though Wells Fargo is going through a tough couple of years, he looks at its overall business prospects. Wells Fargo and USB prospects are good several years out. Wells could generate $40 billion of annual pre-provision income within a couple of years.

7:22a: Buffett again calls on Obama to make it "very clear" what the government is doing. He's the commander-in-chief.

7:23a: Joe asks about Berkshire's "put options" on stock indexes. Buffett says he'd rather have written those derivatives contracts now instead of before, but he doesn't regret the decision and thinks they will ultimately be profitable. They've also generated a lot of income that can be used for investing. Asked about his "weapons of financial mass destruction" comment about derivatives a few years back, Buffett says derivatives aren't "evil" but they are potentially "dangerous." "We use lots of things daily that can be dangerous" like cars. He's used derivatives for many years, and must pay very close attention to how they are used.

7:32a: Buffett says very difficult to answer whether he would let General Motors go bankrupt. Automakers have done a lot of dumb things because their business model doesn't exist any more. They need a new business model and a recovery. Current management and the union didn't get us into the problems. No use being mad at them now. They should work together and try to avoid bankruptcy. Not good to have America's "home-town industry" in bankruptcy.

7:35a: U.S. economy was not a "house of cards" but it was based on "leveraging up." "America works and America was working over the past ten years" but people did some very stupid things involving borrowing too much money.

7:37a: We're lucky we have population growth to "sop up" some of the supply of houses, which is too high right now. We must work through the "glut" of houses on the market. Need to create fewer houses than natural demand will "sop up." Depending on how much new construction there is, the glut could be worked through in a few years.

7:40a: While America made too big a bet on housing over the last ten years, a lot of other things were done right, and some things will be done right over the next ten years. Buffett: "You want to have enough rope to hang yourself, but not enough to hang the whole system."

7:41a: Free markets sometimes overshoot but they're still the best system. When they do overshoot, government is needed to help correct things.

7:46a: Would Buffett thought the Dow would go down to 2000 would he feel an obligation to say, or not to say, it publicly? Buffett says he doesn't know exactly where stocks are going, only that he knows they will go higher over time. Despite some difficult times, the "system works very well." I can "guarantee you" the Dow will be a lot higher in 10 to 20 years, but has no idea what the number will be.

7:48a: Buffett concedes the three billion dollar commitment to Dow Chemical and Rohm & Haas did not turn out to be a good deal for Berkshire, but will stand by it. It looked smart at the time but it looks dumb now. "That's the way the world is."

7:50a: We are doing things that are going to add to inflation. They are things we have to do.

7:50a: Buffett demurs from calling blue-chip stocks the "opportunity of a lifetime" but says it you buy a cross-section of well-capitalized companies you'll make money over 10 to 20 years. No idea whether you'll make money over 10 months. Getting quotes every day makes it hard to focus on the underlying businesses. "Forget the quotes."

7:52a: Geico is worth far more than we paid for it, but other companies we bought are not.

7:54a: People should still try to live within their means, even though lower spending is not helping the economy.

7:55a: To some extent, the people who behaved well are going to find themselves taking care of the people who didn't behave well, but everyone must help others. "There's nothing wrong with being mad, but there are times you have to overcome the emotion." Buffett says he didn't know Bernie Madoff, but if he was in a boat with him on Lake Michigan, and the boat sprang a leak on Madoff's side, he would still try to save Madoff and the entire boat. That is, we're all in this together.

8AM ET HOUR OF ASK WARREN

8:05a Buffett repeats that President Obama needs to be very clear with a message expressing confidence in American banks and support for the system. Bank failure may wipe out shareholders, but depositors need to feel safe. he says there may not be a recovery for Citigroup shareholders.

8:07a: Toxic assets that banks hold probably have the best prospects for returns if the current value is based on mark-to-market. The big problem for banks is not the toxic assets. Banks need to pay very little in dividends and build up their capital positions. "This is a great time to be in banking." Banks can make a lot of money making loans.

8:10a: Buffett says Dairy Queen same-store sales have been up throughout the economic crisis, but Berkshire's higher-end stores see lower sales. American consumers are trading down. Why Tiffany's then? Buffett says we loaned money to Tiffany's, we didn't buy the equity and he thinks Tiffany's will survive the downturn but anyone in the luxury goods business will have a bad year this year.

8:16a: Buffett says he has had only a few informal conversations with President Obama and is not really giving economic advice to the administration, but he repeats his support for Obama. "He is the right president and this is the right country." He expresses no regrets for his support of Obama during the presidential campaign.

8:18a: Obama's stimulus plan is part of the recovery effort but won't do it alone and won't bring about an upturn immediately. Other steps are even more important.

8:19a: Should the SEC suspend mark-to-market accounting? Buffett says people did play games with numbers and probably still do, and has always been suspicious of CEOs in the "honor system." Mark-to-market has put some gasoline on the fire. Buffett thinks mark-to-market should continue to exist but regulators should not necessarily demand that firms raise more reserve capital based on lower mark-to-market values.

8:21a: Buffett repeats that political parties should not think "a crisis should not be wasted" just as Americans didn't say a "war should not be wasted" back during World War II. Buffett says he doesn't want to use CNBC to give President Obama any advice, but should err on the side of doing too much on the economy and banking system rather than too little.

8:23a: What about the uptick rule? Buffett says people who are both long and short can say false things about stocks. Overall, he thinks the uptick rule should probably be put back in place. It is "probably" a good idea. He welcomes those selling Berkshire shares short because they'll be "sure buyers" later on.

8:24a: While biased due to Berkshire's ownership of NetJets, Buffett says it is a mistake to criticize company executives for using corporate jets. He says no one should be "demonized." Buffett says Berkshire has made deals it would not have otherwise made because he has access to a private jet.

8:30a: Buffett wants to see changes in the tax code, but this is not the time to try to make those changes. More important to get the economy working again.

8:31a: Agrees with email question that the Fed and the Treasury have become the "spenders of last resort." They have a "huge role to play" and have been doing it well. Buffett praises Bernanke's leadership at the Federal Reserve. He "should be given a lot of credit."

8:33a: Buffett says union elections should continue to be by secret ballot. He is opposed to the "card check" proposal for worker votes on joining unions.

8:34a: Are bank stocks a good buy now? Buffett says we own some bank stocks and likes them, but does worry that at some point they may be forced to issue more stock. The banking system will cure itself, although Citibank may be a "special case." Investors are lumping all banks together. By and large, banks are in good shape although some will continue to go broke.

8:36a: Financial institutions should not be allowed to get too big in the future, but that doesn't mean they didn't mean to be saved in the past.

8:37a: Buffett won't predict where the price of gold is going in the future, but he notes that it won't be making money for you over the years the way a business will.

8:39a: Government should do everything it can to make the automakers viable at a 12 million to 13 million unit year of sales.

8:40a: "It was essential that people believed in the financial system." Not inclined to second-guess on whether TARP money would have been more effective if cash was given directly to the people.

8:49a: Buffett says hard to know how bad inflation will be in the future, but we are certainly doing things that could boost inflation later on. Still, these things must be done. Best thing for an individual to do is invest in his or her own talents. The U.S. went "import-crazy, consumption-crazy" in the past ten years.

8:50a: Reducing deductions for charitable contributions may hurt a bit but have to look at the big picture. Helping the economy recovery will do the most good for charities.

8:52a: Putting a cost on putting carbon into the air is a "tax like anything else." Utilities will pass on those costs to their customers. Right now, the most important thing is to get the economy moving.

8:54a: What is the biggest lesson you learned in 2008? Buffett answers it is the dangers of extreme leveraging. Leveraging up is a "lot of fun on the way up" but can be a "tragedy" on the way down. The lesson that needs to be learned is we shouldn't let big institutions be "unchecked" in their use of leverage.

8:58a: Average American should certainly avoid credit card debt. Can't make money borrowing at 18 to 20 percent. "I'd go broke." His advice: "Stay away from debt as much as possible."

8:58a: Are you more optimistic or pessimistic about the economy since you first described it as a Pearl Harbor. Buffett says more optimistic because the government did step in last fall to prevent a total disaster and remains optimistic about the economy's long-term prospects. "This country will work fine even if we screw it up."

8:59a: Becky thanks Buffett and signs off today's special edition of Squawk Box.